Global Economics

LG's Chocolate: Will This Cell Phone Hit the Sweet Spot?

Has LG Electronics finally hit a sweet spot in the faddish mobile phone market? Ever since Motorola (MOT) scored big with its ultra-thin clamshell fashion phone called the Razr, back in 2004, a sort of slim-is-in design ethos has gripped the handset industry.

Nokia (NOK) and Samsung (SSNGY) have unleashed their design talent on this segment, and now LG executives think they have a blockbuster in the making with the company's sleek Chocolate phone. "It is a breakthrough product for us," says LG Executive Vice-President Jae Bae.

The dark, rectangular Chocolate phone is certainly a head-turner, and LG definitely needs a winner to save its money-losing mobile phone business. The Chocolate garnered industry accolades such as the prestigious European 2006 Reddot Design and IF awards for its excellence in design and user-interface, and has been drawing a lot of orders from distributors. And the handset was recently ranked the best-selling mobile phone by Carphone Warehouse, Europe's biggest mobile phone retail chain.

MUCH-NEEDED CASH. In less than three months since its global debut in May, some 1.4 million phones have been sold in Europe, Asia, and Latin America. Another 500,000 have been sold in South Korea since its premiere there last November. LG, which is expected to launch the Chocolate in the U.S. come August, hopes the $500 phone will be a 10 million seller by the end of June next year.

If their hopes materialize, it would be a much-needed cash infusion for a company struggling big time with its handset business. On July 19, LG reported a $10 million net loss in the three-month period ended in June, thanks to troubles with its mobile-phone and flat-screen businesses (see BusinessWeek.com, 7/11/06, "LG.Philips LCD Swings to Loss in 2Q").

Its mobile phone business posted an operating loss of $3 million, which follows $32 million in red ink during the first quarter of 2006. LG argues the six-month loss was due largely to increased marketing expenses and investments and that the company will move into the black in the second half.

WHAT'S NEXT? "We have been building up muscles for growth," says Bae. He notes that LG emerged from virtual obscurity earlier this decade to become the fourth biggest handset maker—after Nokia, Motorola, and Samsung. "Now the Chocolate phone will give us a chance to make another leap forward," he predicts.

Some wonder if enthusiastic LG execs might be on a bit of a sugar buzz. "The Chocolate phone certainly has the potential to be a blockbuster, but this doesn't mean LG will be sailing for the next couple of years," points out Kevin Lee, telecom device analyst at Woori Investment & Securities in Seoul. The question, he adds, is whether the company can follow up with a succession of hit models to charge ahead in the fiercely competitive and ever-evolving industry.

Others note that it was Motorola and its Razr that really created the entire segment for slim phones, and the Chocolate is merely a variation on the same theme (see BusinessWeek.com, 12/5/05, "The Leading Edge Is Razr-Thin").

NOT JUST CANDY. There are other imitators as well. Nokia recently rolled out its award-winning 8800 cell phone, while Samsung introduced three super-slim phones under its "Ultra" line. "I don't think LG is out of the woods yet," warns Greg Roh at Korea Investment Securities.

LG claims Chocolate is more than fashion candy. "Just as Apple's iPod created a new culture among users of digital music players, Chocolate connects to emotions of its users," says Cha Kang Heui, LG's chief handset designer. Unlike Razr or Nokia's 8800, that ostensibly demonstrate high-tech features, Chocolate's designers sought extreme minimalism to make it look like a black chocolate bar, not a phone.

LG incorporated other features to give the phone a special character. Slide the phone open and its touch-sensitive keypad glows red and its LCD screen—which sleeps when not in use—suddenly light ups. "This is designed to give users emotional satisfaction with a surprise," Cha says.

EUROPEAN REACH. Although it is only 16.5 mm thick and weighs 88 grams, it packs a 1.3 mega-pixel camera that also doubles as a camcorder and an MP3 music player. It boasts 128 megabytes of built-in memory and Internet access. "The Chocolate phone is a more playful, narrative phone," says Peter Zec, initiator of the Reddot Design award in Germany. "It's very charming. I can imagine teenagers really liking it."

LG expects the Chocolate phone's popularity will help expand its reach in Europe, where sales are less than half those in the U.S. A latecomer to GSM technology—the standard in Europe which is the biggest phone market—it needs to appeal directly to users there. Especially because many European consumers buy phones on the open market rather than through a carrier.

This year, LG seeks to sell 70 million handsets, with GSM phones making up more than half of the total. The company sold 55 million phones last year. It's vital for LG to boost its European presence if it is to achieve its target of edging past either Samsung or Motorola to become the world's No. 3 by 2008 or 2009.

PROVING TIME. The goal appears to be a long shot. In the first quarter of this year, LG's global market share was 6.8% against its nearest rival Samsung, which held 12.7%, according to researcher Strategy Analytics. Industry leader Nokia had 32.8% while second-ranked Motorola had 20.1%. Industry observers believe LG will have to increase its market share by a few percentage points every year if it wants to narrow the gap with Samsung (see BusinessWeek.com, 7/13/06, "Samsung's High Design, Lower Profit Cell Phone Strategy").

Perhaps more important, LG will have to control costs to narrow the profitability gap with its rivals. "Even if the Chocolate phone is a success, LG has a lot of proving to do," says Yoo Jung Sang, chief investment officer at fund manager PCA Investment Trust Management. "LG has no cost advantage in a low- to mid-end market against Nokia and Motorola, while it is lagging behind Samsung in the premium segment."

LG execs say the Chocolate is only the beginning of a series of stylish handsets it hopes to launch in the years ahead. "It is just the first model in our premium Black Label series that will be both fashionable and full of multimedia functions," Bae says, adding the next "big" model will be released by early spring. The company's immediate target is to grab a 10% global market share and a high single-digit profit margin next year. If Chocolate continues to delight, LG may be a step closer.